THE KNOW HOW FUND

THE EARLY YEARS

Keith Hamilton

The Sovietisation of eastern Europe in the aftermath of the Second World War was as

much an economic as a political accomplishment. Communist command economies,

divorced from free market mechanisms, were imposed upon countries whose

economic and social structures the Soviet Union sought to integrate with its own.

Existing administrative, commercial and legal institutions were meanwhile either

destroyed or adapted to suit the needs of party and ideology. With the Red Army in

occupation of most of Europe east of the Elbe, British diplomats were rarely able to

do more than speculate about Soviet intentions and protest when the principles

enunciated at Yalta were flouted or ignored. In a paper of 12 March 1946, detailing

the way in which the Russians were remoulding the economies of the lands they

occupied, John Coulson of the Foreign Oftice's Economic Relations Department

argued that Britain had few if any means with which to counter this process. The best

we can do', he concluded, 'is to hold the door open- or to hold enough doors open­

for the East Europeans to catch frequent glimpses of a more attractive and more

prosperous world in the West and to be encouraged, when the occasion offers, to pass

through.'

The idea that the East European satellites could, or would, eventually be

drawn away from Moscow's grip by the magnetism inherent in the economic strength

of the Western system was one that was to surface time and again in British

diplomatic thinking during the next forty years. There were occasions, as in the mid-

1970s, when British officials found cause to doubt the validity of this assumption. The

oil crisis of 1973, the onset of recession, the advance of communism in Portugal and

southern Africa, and progress towards detente in Europe, led some to wonder whether

the Iron Curtain would disintegrate, not as the result of capitalist corrosion, but under

the deadweight of a collectivist consensus. It seemed possible that the East/West

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divide might be rendered irrelevant by one side's drift toward economic dirigisme

and the other's need to respond to th requirements of mark t force . evertheless,

during the 1980s the all too apparent hortcoming of of the command conomies of

the East, their failure to adjust to the challenge of the n w techn 1 gies, the birth of

popular reformist movements in central and eastern Europe and the initiation of

perestroika in the Soviet Union led to there-em rg nc in Whitehall of the notion of

the West as a pole of attraction which must exert a p werful pull up n di sidents and

opponents of the existing communi t governm n . The am d vel prnents also

persuaded the British government to endor more proactiv p licie aimed

specifically at fostering a creative ferment which, it was anticipat d w uld gradually

undermine the Sovi t sy tern in astern Europ . Thi , in practic , m ant enc uraging

economic and political reform in individual c untri whil h lding ut th pr pect

of Western assistance if that were achieved.

Responding to Reform in Poland

Rarely was the policy mad m r xplicit than wh n th Prim Mini t r, Margaret

Thatcher, vi ited War aw in arly ovemb r 19 8. Th pr vi u umm r had n a

politically turbulent on in P land, in which a min r h d n f 11 w d by

consultation between th g v rnm nt and w nd th f rmati n f a

new reformi t cabin t. And during h r vi it th Prim Mini t r d th

emphasise the need for political chang if ec n mic r f rm wer t hav a hanc f

succeeding. She declared publicly that mmitm nt, the

resolve and the per verenc to break thr ugh to uc , their fri nd w uld r ady

to help in practical way : by upporting an IMF ref rm pr gramm ; by f£ ring

credits; by re ch duling debts~ by backing inv tm nt; by stabli hing j int v ntur ;

and by increasing contac of v ry rt b twe n gov mm nt and p pl . Th

message was clear and it became increa ingly r levant to Poland' ituation as the

refonn process gathered pace during the winter of 1988-89. Round tabl talks began

between the government and its opponents in February, and th r suited in the re­

legalisation of the previously outlawed Solidarity movement, and the announcement,

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early in April, of both wide-ranging economic reforms and the holding of elections in

which 35% of the seats were to be freely contested. Meanwhile, the Poles, like other

east European peoples, had to contend with a slowdown in growth, a convertible

currency crisis, shortages and imbalances in the production and supply of goods, and

serious environmental problems.

The Polish authorities evidently anticipated that once they had demonstrated

their reforming zeal they would be able to secure financial assistance from the West,

especially, they hoped, agreement on the rescheduling and reduction of their

enormous foreign debts. They were already negotiating with the IMP and the United

States wasted no time in offering aid. Nevetheless, in the absence of an agreed IMP

programme with its probable restrictions on Polish government-spending, neither the

British government nor its European partners were enthusiastic about providing the

Poles with the substantial financial assistance they desired. The Poles had recently

adopted measures to encourage foreign investment and joint capital ventures, but they

had hardly begun to tackle underlying problems of macro-economic adjustment. Real

incomes were still high, there was a growing budget deficit, and there was no end in

sight to subsidisation and high int1ation. Western credits had in the past seemed

simply to contribute to Poland's overall indebtedness without effecting any

improvement in Poland's government. Moreover, given the fact that the communists

and their allies had been assigned a majority of the seats in the forthcoming election,

there was good reason to think that the Chairman of the Council of State, General

Jaruzelski, would retain his hold on power.

There was, however, a strong desire in Whitehall to make some kind of

gesture to the Poles which would reassure them of continuing British support for their

reforming policies. No. 10 and FCO ministers wanted Britain to be able to build on

links already established with the refonn movement in Poland: there was a wish to see

Britain take the lead and not be outpaced by other Western powers. Quite what might

be done for Poland had already been discussed at a seminar which the PCO's Eastern

European Department hosted on 21 March 1989. Its participants, who included

3

academics, publicists, parliamentarians and representatives of other Whitehall

departments, recognised that without a massive financial injection the West's scope

for promoting reform was limited. They also accepted that while eastern Europe was

in many respects peripheral to British interests, the West as a whole had an interest in

the long-term stability of the area. And with this in mind, it was suggested that the

British government might look at the provision of legal and political expertise with a

view to helping the establishment of proper democratic structures. The idea was

considered a good one and officials soon began elaborating on it. If Britain were

going to help foster politicalliberalisation and economic efficiency in eastern Europe,

then there was evidently much to be said for trying to transfer there British expertise

over a whole range of subjects. These, it was thought, might include the establishment

and running of political parties and election campaigns, parliamentary institutions and

procedures, the workings of an upper house, the rule of law and the functioning of an

independent judiciary, and arbitration in industrial disputes. Overall, the aim would be

to target British efforts in this area better so as to maximise their contribution to the

democratic development of eastern Europe.

The Genesis of the Fund

The emphasis at this stage was still upon the transfer of essentially political and legal

skills. But during her visit to Warsaw the Prime Minister had offered the Poles British

expertise in a distinctly non-political sector: she had proposed that the British might

assist them with management training. There was nothing that was particularly novel

about this idea. An International Management Centre, supported largely by corporate

and private · finance, already existed in Budapest, and the British Council had

commissioned a report on how the British might help the Poles with management

training and education. The report, prepared by a specialist in management studies,

recommended, among other things, the establishment within the DTI of a 'British

Polish Productivity Agency', which would act as a clearing house for requests from

Poland for help and assistance, arrange for visits by Polish managers to the UK and

encourage a flow of information and joint business ventures. British diplomats in

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Poland readily embraced the notion of Britain assisting the Poles in this sphere. If the

Poles were going to shift towards a market-oriented economy, they would need to

know more about market economics in general. It .seemed therefore to make sense to

invite leading Poles to attend seminars on banking and the stock exchange and,

whenever possible, to encourage British universities to develop appropriate courses

for east Europeans. Diplomats, who had long grown accustomed to having to adapt

their practices to the latest philosophy of management, now found in the prosepective

export of management theory a convenient means to the achievement of a diplomatic

end.

More important, perhaps, was the fact that the idea also seemed to appeal to

the Poles who suggested that Britain might be interested in financing a management

school in Poland. Such a project would have the virtue that it would be visible both in

Poland and Britain: it weuld be a major contribution to reform and an eye-catching

venture. But FCO officials were already considering a broader-based scheme, a

package which would bring together elements of all the proposals so far made for

assisting the Poles. They had to bear in mind that Jaruzelski was due to visit London

in June and that the Prime Minister would want to be able to offer him something.

They were also still awaiting agreement on an IMF economic adjustment programme

which would open the way for further international financial assistance for Poland. In

these circumstances, at the end of April 1989, the East European Department

proposed the establishment of what was termed a Know How Fund (KHF) for Poland

which would be able to promote the transfer of expertise in all areas. As originally

conceived, it was to be activated by encouraging professional bodies and other non­

governmental organisations to cooperate with the Poles in relevant areas - an

important point since this would he a means of stimulating further change without

appearing to underpin Poland's communist government. The Fund would thus help

finance the work of British management consultants in Poland, as well as such

individuals and institutions who could provide the Poles with advice and assistance on

a wide range of administrative, business, educational, financial, legal, media and

5

political matters. This was intended to be far more than just a sop for the financial

help the Poles were seeking; the KHF went beyond ge ture and sound-bite diplomacy.

There could, after all, be no privatisations in Poland without company law, without

bankruptcy procedures, and without accountant and auditor . Capitalism, like

democracy, required a legal and institutional framework.

Funding Know How

Before any further decisions could be taken on th po ibl c p of the Fund,

agreement had to be reached both on its ize and from wh r it hould c me. It was

eventually settled that Jaruzelski would be told that th Briti h g v mm nt would be

ready to contribute £5 million a year over live year to a KHF. Th fir t tranche of

this was to be met from the Trea ury' c nting ncy re rv . But the FCO was

entering uncharted waters: the Ea t Eur p an D partm nt had littl idea f how the

Fund might be admini tered, only the br ad t n ti n f what pr j ct might be

financed, and no experience of im plem nting a maj r aid pr ramm . R p n ibility

for managing such programme lay not with th ' Dipl matic Wing, but with its

other half, the Overseas Development Admini trati n A) . It, h w v r, was

primarily concerned with developmental pr j ct in th Third W rld. Th r cipi nts

of its aid were developing, low income c untrie , in many c larg ly agricultural

with a limited industrial base. They ould n t a ily b uat d with P land, which

had relatively good physical and human re ourc b . And th f u f Know How

diplomacy would be mor transfonnati nal than d v 1 pm ntal: i

with assisting an over-indu triali ed ex-communi t untry t mod mi e i economy

and help its industry to learn to operate a fr mark t conomy. N v rth l , it was

also apparent that when it came to dealing with con ultants, drafting contracts and

evaluating and monitoring projects, the ODA had kill and xp ri nc which few in

the Office's Diplomatic Wing po ses ed.

Moreover, there were budgetary rea n f r eeking t involv the ODA at an

early stage in Know How work. The £25 million all cat d to th Fund for P land was

initially seen as additional to the Diplomatic Wing v te : th Office' already

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overstretched diplomatic budget was not required to cover anything more than the

staffing of the Fund's skeletal administration. But even before 10 June, the day on

which the Prime Minister informed J aruzelski of the establishment of the Fund, it was

evident that other reforming governments in east-central Europe were, or would be,

looking for similar asistance. The Hungarians were an obvious example. They had

long since begun to liberalise their economy and were due to hold free parliamentary

elections. Indeed, in the eyes of some they presented a more deserving case than the

Poles, and it was cetainly going to be very difficult to justify aid to the latter without

giving some consideration to the former. Added to this, Polish politics took an

unexpected turn. The elections did not produce a communist-led coalition

government. Voters chose to strike off the names of communist candidates, with the

result that opposition parties received what amounted to an overwhelming public vote

of confidence and this led eventually to the formation of a new government under the

leadership of the former Solidarity activist, Tadeuz Mazowiecki. The British

government wanted to endorse this triumph of democracy, and during the autumn of

1989 officials in Whitehall began to discuss, not only the extension of funding to

Hungary, but also the possible doubling of the Fund for Poland. Given the sums

involved and the nature of the work, it seemed expedient to shift the bulk of future

funding onto an enhanced ODA aid budget. The money involved would be additional

to what was already being expended on developing countries, and the essentially

political work of the fund would remain the financial responsbility of the Diplomatic

Wing. Early in the autumn of 1989 it was agreed that £25 million should be allocated

to a Fund for Hungary, though this would not become operative until the following

April and, as in the case of Poland, it would be spread over a five year period. Later in

the year, during a visit by Lech Walesa to London, the doubling of the Polish fund to

£50 million was formally announced.

Administering the KHF

This expansion of funding and the need felt by diplomats for ODA advice and

assistance on aid management led in turn to administrative changes. During the

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summer of 1989 the fund was effectively run by the East European Department. Its

staff very often had to improvise in order to cope with a seemingly endless stream of

enquiries from prospective recipients of Know How Funding. They had also to

concentrate on projects which could be got off the ground quickly so as to avoid any

significant underspend by the end of the financial year. Some of these were run in

conjunction with companies and other outside organisations which approached the

Office with proposals soon after the announcement of the fund; others were managed

by the British Council. The latter were experienced in handling such work on a

contract basis for government departments and agencies and in August 1989 they

agreed, initially on the basis of a gentlemen's agreement, to take over a list of

projects. The Council already had many of these on the tocks and orne, which were

part of an existing management training programme, could go ah ad a on as

finance was available. As a result, while the Office hoped eventually t redres the

balance by including more political schemes, the li t was initially w ighted heavily

on the side of management and bu ine activitie . By the mid-autumn f 1989 s me

fifty projects were underway.

Meanwhile, thought was given a to how the Fund might b t be managed. At

first, it was as umed that a small unit might b t up within th Ea t rn European

Department specifically for thi purpo . But th pot ntial workload f such a unit

was grossly underestimated. One suggestion, for in tance, wa that th Fund could be

run by a senior or retired diplomat with the aid of a p r onal a i tant - a rt of one

man and a dog's-body op ration. Indeed, when in Oct b r it w finally ttl d that

the Diplomatic Wing would share respon ihlity for the Fund with th ODA, the Joint

Assistance Unit (JAU), which they e tahli hed for its admini trati n, was barely less

rudimentary. It was headed by former research offic r with a per nal a i tant and an

ODA official as his deputy. Two official and a seer tary were thus left to manage a

Fund whose remit was to provide advice and expertise and facilitate the transfer of

knowledge and skills from Britain to Poland, and sub equ ntly Hungary, in order to

enable them to make progress towards democracy and a market economy. Their

8

programme might include the provision of small amounts of capital equipment where

this appeared essential to make a success of any given scheme. At the same time, they

had to take account of a newly-established Advisory Board: a body, chaired by an

FCO minister, and composed of MPs from each of the three main parties, five

representatives of the worlds of business and finance, two journalists, an academic, a

trade unionist and a representative of the Conservative Council for Eastern Europe. In

addition to providing advice, this was intended to give political cover and protection

to the Fund.

By the time of the Advisory Board's first meeting on 16 November 1989, the

Office in general and the JAU in particular were already coming under considerable

public pressure to do more for Poland. The former Prussian province of Silesia is

probably best remembered by most students of modem history for Frederick the

Great's campaigns and the plebiscite of 1921 But in the autumn of 1989 the BBC

discovered in the Oder basin an environmental disaster of the first order, and, judging

from the FCO files, the British public awoke, like Maria Theres~ to find Silesia

inscribed upon their hearts. The media demanded aid for Poland, and those who were

in the know looked to the Know How Fund to provide it. Located in one room, the

three members of the JAU were soon having to deal with between sixty and eighty

telephone calls a day, and by the end of November, when they were still trying to

develop and define a strategy for handling proposals and requests, pulling the plugs

on telecom became not so much an option as a necessity. Meanwhile, on 29

November, the F reign and Commonwealth Secretary, Douglas Hurd, formally

announced the doubling of the Fund for Poland and the commitment of a further £15

million to assi tin the improvement of Polish food supplies.

Expansion and Extension

By the time of this announcement, it was quite clear that countries other than Poland

and Hungary would soon be in a position to assert a moral claim for Know How

Funding. The demolition of the Berlin Wall raised the prospect of a reformed East

Germany seeking British aid, and events in Germany had their impact upon

9

Czechoslovakia, a land which until recently had been judged reformable but not yet

reforming. If, however, funding were to be extended to Czechoslovakia and the

former GDR, the FCO would have to negotiate new arrangements with the Treasury.

The Office would have liked to have settled on a large global figure for the Fund, say

£150 million, which could be allocated as the JAU saw fit. At the same time officials

were keen to ensure that the extension of funding should not place new demands upon

existing FCO budgets. The FCO was already facing up to the prospect of having to

expand existing missions in eastern Europe and possibly even to open new ones, and

it was aware that there would be strong public opposition to any move which might

imply cutbacks in the existing overseas aid programme. M n y intended for the

developing countries of Africa and Asia could not be chan lied t a fund intended to

assist the relatively prosperous peoples of east-central Eur p . In the end, in January

1990, the Treasury agreed to release a further £10 milli n from th Re erve, and

assented to arrangements whereby the FC would b abl t xt nd funding to

individual countries according to their commitment to r form. It wa still, however,

necessary to gain Treasury consent in ach in tance, and bud tary limitations

remained a persistent problem for Fund manager . G v rnm nt Minist rs w r also

frustrated and irritated by their inability to as ume th 1 ading r 1 to which they

aspired in the de-Sovietisation of the East. They wer only to w 11 awar that fine

words were no substitute for financial tr ngth wh n it cam t practising

transfonnational diplomacy.

Margaret Thatcher used the visit to London of the C cho lovak President,

Vaclav Havel, on 21-22 March 1990, and an Anglo-G rman ummit, om nine days

later, to announce the extension of funding to Czecho lovakia and East G rmany. In

the case of the latter country money was u d largely to promot English language

training and disbursement ended after German unification. But in th spring of 1990 it

seemed quite possible that at some point in th not too distant futur Bulgaria,

Romania and Yugoslavia would all qualify for a istanc . It wa ven po ible that

reform in the Soviet Union would lead to funding being extend d furth r eastwards.

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And to meet the prospect of an ever-extending Fund the JAU evolved the principle of

differentiation whereby the type and degree of aid was supposed to match the stage of

reform reached by each country. Country-specific priorities were developed along

with country strategy papers, which were given Whitehall circulation, and a number

of sectoral reconnaisance missions were financed with a view to identifying key areas

for assistance. These covered several broad areas: banking, finance, accountancy and

privatisation; employment issues, such as the setting up of social welfare networks,

the retraining of those made redundant, and the stimulation of small businesses;

management training; English language training; and 'political' projects, such as

assistance to parliaments and training courses for journalists. And within these areas

the JAU established principles to guide its intervention. It thus sought to concentrate

on activities which would: (1) energise the private sector and, wherever possible, have

a catalytic effect; (2) be based in east-central Europe; (3) deal with the training of

trainers; (4) develop sustainable links between British and east European institutions;

and (5) be well publicisable - it was always regarded as politically important that the

fund should be highly visible in its activities.

Mandarins, Management and Manpower

Funding on this basis could not be administered on the two men and a P A principle

established in the autumn. Aid budgets are notoriously labour intensive with

administrative costs estimated variously at 2-3% of programmes. And Know How

diplomacy was no exception. The very nature of the work, which involved funding

numerous relatively small projects, meant that manpower costs per project must be

high, and this was evident in the rapid expansion of J AU staffing in the winter and

spring of 1990. By the end of the year the unit had a staff of twenty-three drawn from

both the Diplomatic Wing and the ODA, and organised on a country, rather than

sectoral, basis. This was a structure which allowed for the co-ordination of Know

How work so as to meet the differing national needs of post-communist societies. It

also complemented efforts to maximise the Fund's impact by the targeting of

activities which would serve as a stimulus to further change and help provide an

11

enabling framework for the transition to liberal democracy and capitalism. After all,

the JAU could not afford simply to await and evaluate proposals. Nor could it wholly

neglect the desire of other Whitehall Departments, particularly the Departments of

Employment and the Environment, the Ministry of Agriculture, Fisheries and Food

(MAFF) and the Department of Trade and Industry (DTI), to have a say in how the

Fund was managed and applied.

Ministers from home-based Departments were eager to become involved, and

their efforts soon impinged upon the fund's multifarious activities. The Department of

Employment, for instance, mounted a series of reconnaissance missions, and these

were followed by ministerial visits to Poland, Czechoslovakia and Hungary.

Memoranda of understanding were concluded with local ministries of labour, and

these subsequently formed the basis of Know How Funding in the employment sector.

The MAFF took the lead in dealing with the Poles on the proferred £15 million grant

to assist Polish food supplies, and the Department of the Environment attempted to do

its bit for local government. The DTI posed a more difficult problem. It had a

particular brief for British manufacturing industry and naturally tended to see in the

Fund an opportunity to develop commercial and investment links between British

industry and and east-central Europe. If Fund projects were to involve the

employment of British consultancies then there seemed every reason to suppose that

such links might lead to further and possibly more advantageous contacts and

contracts. And it was partly with a view to satisfying the DTI that the JAU devised

two commercially-oriented schemes to encourage British investment in eastern

Europe. One offered to cover 50% of the costs of pre-investment feasibility studies,

and the other aimed at funding the training of a limited number of key potential east

European venture partners. Meanwhile, in April 1990, a DTI official was seconded to

the JAU to administer the schemes: a move which increased contact between the two

Departments and probably encouraged a greater understanding of the ways in which

the JAU's efforts to reform the economic and financial infrastructure of eastern

Europe could in itself bene tit British industry.

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Putting Principles into Practice

The involvement of other Whitehall Departments could, of course, be paticularly

valuable when it came to spotting potential projects. One of the problems that British

diplomats faced in 1989 and 1990 was that of identifying and prioritising the needs of

recipient countries. Very often they found themselves ventriloquising the

requirements of peoples who had no previous experience of democratic politics or

market economics. What new skills, for instance, would a privatised Polish banking

system need? Some of the early projects were clearly designed to provide answers to

such questions. In September and October 1989 the FCO sponsored conferences in

London and Warsaw which were specifically designed to examine how British

expertise could best be used to assist the Poles economically and politically. But the

JAU also had supply-side problems. Projects aimed at commercial and industrial

restructuring were bound to involve considerable sums of public money and some

would have to be put out to tender. This, in tum, meant delays in awarding contracts

and almost inevitably complaints from firms and other institutions whose projects

were not accepted as quickly as they would have wished. In this context the JAU was

also anxious to avoid duplicating the work of other technical assistance programmes.

The KHF was a front runner in Poland and in a good position to initiate projects in

some sectors, but in Hungary, Czechslovakia and, subsequently, the Balkans, it was

increasingly necessary to take account of the work of the EC's PHARE programme,

and the bilateral assistance being delivered by other Western powers.

Know How Funding was also to some extent dependent upon the readiness of

governments of recipient countries to maintain the pace of their reform programmes.

British assistance was not being given on a government to government basis, but,

quite clearly, a consultancy project aimed at providing advice on privatisation could

make little progress if governments were reluctant or tardy in proceeding with

privatisation legislation. Likewise, there was little point in offering advice on

industrial restructuring if state enterprises were simply transferred to the private sector

without any prospect of a change in management. In these respects, Know How

13

Funding was likely to he more successful in those countries that opted for a radical,

rather than a gradualist, approach to economic change. Nevertheless, there was almost

everywhere in reforming eastern Europe, scope for relatively small projects relating to

public administration, education, the media, management training and the law. Within

the frrst month of the Fund's operations in Hungary, in April 199 , the British Council

had organised a study tour of British management training institutions, and was

preparing plans for a consultancy mission in univer ity finance and con ultancy

advice on the revision of the political science curriculum of Hungarian universities.

The opportunity for East Europeans to gain first hand experi nc of Western

management techniques, through short-term attachment to Briti h c mpanies, was

also provided by the pilot Joint Industrial and Commercial Award Programme

(llCAP), which the Fund launched in Poland.

The project a joint programme developed by th Confed ration f British

Industry and the British Council, sought both to improv Polish und r tanding of

industrial and commercial organisations within a fr mark t and t give Poles

practical experience of market-oriented institution in Britain. A total of tw nty-one

middle-ranking Polish managers were placed for eight w ks with Briti h c mpanies

at an average cost of £4,000 per candidate. Efforts wer mad to match candidate to

finns according to business sectors and common intere ts, and a num r of c mpanies

offered formal training as well as 'on the job' practice to participan . Lat r, wh n the

project was reviewed by outside evaluators, respon from participan indicated that

they all felt they had a clearer gra p of the working of a mark t c n my and there

was evidence that improvements had been achieved in their manag rial xp rti . It

was also recommended that the programme should be extend d to cover all branches

of the economy including profes ional bodies, and JICAP i now e tabli hed as a

'regional' (i.e. multi-country) scheme with placements for managers from all the KHF

recipient countries now totalling over 1000.

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Flagship Projects

Even, however, before the Fund was fully established there was a hankering on the

part of Ministers and officials for the sponsoring of larger scale projects, and for the

concentration of resources in specitic sectors and in particular localities. One

suggestion made in 1990 was that the JAU might take a town in Hungary and apply

British expertise over a whole range of local government services, and town-twinning

projects aimed at extending some British local government practices to eastern

Europe have since become a common feature in KHF country programmes. There

were obvious advantages to be derived from engaging the Fund in big flagship

projects. Not least of these was the fact that this would be high profile work. The

Fund, the FCO and Britain would be seen to be doing something positive in east­

central Europe. Highly visible projects were, however, also likely to be highly risky

ones, and this was apparent in three comparatively successful ventures which the

Fund helped sponsor, notably the Katowice Banking School, the Budapest Stock

Exchange and the Czechoslovak privatisation scheme.

The first of these, the Katowice Banking School, represented an endeavour to

assist the banking sector in Poland by drawing upon the undoubted expertise of the

City of London in financial services. Poland's need was clearly identified and this was

an area in which Britain had a comparative advantage. The British Council conducted

surveys of the training and development requirements of Polish banks and their

employees, and in July 1991 the JAU participated, along with British and French

banking institutions, in a technical aid programme concentrated upon the newly­

fonned Katowice Banking School. The Fund was used to pay for the supply of British

bank trainers and over a period of three years something like £1.4 million was spent

on the project. A large number of junior and middle management bank employees

were able to take advantage of short-term residential courses at the school and 2,000

of these received British financial assistance. Yet the school's training was by local

standards expensive to deliver, some courses failed to address issues directly relevant

to the occupational requirements of trainees and the recently-privatised Polish banks

15

were evidently still uncertain of the skills required by their personnel. Moreover, the

school, which it had originally been hoped to make the apex of professional banking

education in Poland, soon had to reckon with significant competitors in the shape of

the German-sponsored Gdansk Banking Academy and the American-funded Warsaw

Institute of Banking. Its location in Upper Silesia, some three hours train journey from

Warsaw, was also far from ideal and led some to wonder whether it could ever aspire

to be anything more than a regional, as opposed to national, centre of excellence.

An equally prestigious enterprise in which the Fund was to become involved

was the Budapest Stock Exchange. One of the largest single projects assisted by the

fund in Hungary, it aimed at aiding with the design, appraisal and implementation of a

new trading floor. PHARE agreed in principle to finance the new computer hard and

software at a cost roughly equivalent to 32% of the whole project, and over a three

year period the KHF contributed £1.1 million or 23o/o of total costs. In effect the

Hungarians were trying to set up a stock exchange from scratch and in the process the

advice of two British consultancies was sought, if not always followed. The scheme

was completed in 1994 leaving the Hungarians with one of the finest computerised

trading floors in east-central Europe. But Hungarian government forecasts regarding

their privatisation programme - the programme that was to provide the stock to be

traded - had been wildly optimistic. The three-fold expansion of market

capitalisations achieved by 1994 hardly compared with forecasts of a ten-fold increase

between 1990 and 1994. Moreover, by 1994, the capacity of the financial sector in

Hungary to meet the challenges of developing and supporting capital markets was still

uncertain, and there was as yet no adequate regulatory framework for securities issue

and trading. If, however, the trading floor was, on completion, working well below

capacity, it should not be overlooked that the project had done much to promote a

trading culture in Hungary and that there was a symbolic significance in Britain, with

the largest financial market in Europe, being seen to assist the Hungarians with their

stock exchange.

16

British financial expertise was possibly put to better use in Czechslovakia.

There the Know How Fund provided the Czechoslovak, and subsequently Czech and

Slovak, authorities with Consultancy advice on a . mass privatisation scheme. This

involved the registration of individuals at a fee approximately equivalent to average

of one week's earnings, the issue of investment points in the form of vouchers, and

the use of these to purchase shares either directly or through specially organised

investment privatisation funds. Over a two-year period and at a cost to the KHF of

just over £3 million, British Consultancy advice was given firstly to the federal

authorities in Prague and then to the separate Czech and Slovak administrations, and

almost 1,500 enterprises, previously responsible for half Czechoslovakia's GDP, were

transferred to private ownership. It was a high cost, high profile and high risk

operation. The cost of meeting consultancy fees was large when compared with the

total Fund resources available for Czechoslovakia, the project was a key element in

the federal government's plans for liberalising their economy, and it was always

possible that there would be insufficient political and public enthusiasm to sustain

privatisation on the scale originally envisaged. Its chief virtue was that it gave 70% of

the adult population of the former Czechoslovakia the opportunity to share in the

ownership of what had been state assets and, in so doing, encouraged the creation of

capital markets and the development of fund-management expertise in the two

successor republics. Voucher privatisation in Czechoslovakia was an instance when

the JAU managed successfully to combine knowing how with knowing when and

where. It also provided a useful model which other countries of the region could

adopt. Indeed, experience gained in Poland, Czechoslovakia and Hungary was put to

good use when in Know How Funding was extended t1rst to the Soviet Union and

then, early in 1991, to Bulgaria and Romania.

Encouraging Change in the Soviet Republics

Extension eastwards brought new problems, political as well as financial: the British

government wished to work in concert with its partners and allies in enouraging

Gorbachev' s reforms, but was reluctant to offer assistance until the Russians had

17

demonstrated their readiness to adopt the discipline of the market. The Soviet Union

could not in any case be treated like its western neighbours. It was much larger in size

and its pace of reform much slower; it had no tradition of entrepreneurial activity on

which to build; the authorities there seemed to have little understanding of what was

required; popular inertia and bureaucratic obstruction seemed likely to inhibit change;

and some of the constituent republics were moving rapidly towards full independence.

Moveover, in order that a Know How Fund for the Soviet Union should be credible

and bear comparison to what had been offered to other countries, substantial new

money would have to be found in Whitehall, and new personnel recruited to

administer it. Even after the announcement on 15 November 1990 of a £20 million

KHF for the Soviet Union, with disbursement commencing on 1 April and spread

over two years, project implementation was delayed first as the re ult of political

repression in the Baltic republics and then because of the uncertainties g nerated by

the failed coup of August 1991 . Operations were put 'on hold' whilst Ministers

debated the wisdom of seeking to refonn the apparently unreformable. The JAU was

nevertheless already preparing a strategy paper for the USSR, and by July 1991 eight

technical assistance projects had been approved and funds committed, a further eleven

were under appraisal, and money had been earmarked for for financial rvices, small

business and distribution techniques missions intended to identify project work. And

in the following spring a separate JAU (henceforth designated the JAU (E) ) was

established for what had by then become the former Soviet Union (FSU). Soon

afterwards annual Know How Funding was effectively doubled for the Russian

Federation and neighbouring successor states.

The KHF for the former Soviet lands wa from its inception more narrowly

focused than that operating in Poland, Hungary and Czechoslovakia. In August 1990,

when it was still uncertain whether additional resources would be available for the

Soviet Union, the JAU had proposed a modest programme of technical assistance

concentrated upon a single agreed economic problem, such as the processing, storage

and distribution of key foodstuffs in a given geographical area or constituent republic.

18

The DTI was already meeting half the costs of a consultancy study undertaken by a

British consortium on the food chain in the Ukraine, and wished to involve private

fmance more actively in such Know How work. The Prime Minister similarly

favoured creating conditions which would encourage British ftnns to invest, and other

Whitehall Departments which were eventually persuaded to contribute to the Fund

were inclined to prefer projects in keeping with their administrative mandates. Their

views were to some extent reflected in Douglas Hurd's Parliamentary announcement

of the Fund. He told the Commons that assistance was to be provided to the Soviet

Union 'in close collaboration with the British private sector', and that it would be

targeted at four specific areas: food distribution and agriculture; energy; small

business formation; and financial services.

Project Expansion in the FSU

Amongst the earliest projects considered for funding in the Soviet Union were a

feasibility study for a new Project Finance and Export Development Bank in

Moscow; a plan to help establish a Business Centre in Leningrad (St Petersburg) with

the aid of the Manchester Business School; and a proposal from a British Consultancy

for the provision of wide-scale advice and co-operation it:t the field of energy

efficiency in industry. The Department of Employment also despatched a small

business mi sion to the Soviet Union in July 1991. But the mission's assumption that

project agreements had to be concluded at an All-Union level, and its apparent

tendency to regard the state sector as the medium through which to encourage private

enterprise, drew som criticism from the British embassy at Moscow. The mission

seemed to neglect local requirements and to be guilty of 'old thinking' both in the

British and contemporary Soviet sense. Indeed, at a time when political power was

shifting into the hands of republican leaders and when the Soviet Union was evidently

on the verge of collapse, it appeared to make more sense to channel assistance to its

constituent parts. Early in September 1991, shortly before Moscow's formal

acceptance of their independence, the FCO confirmed that Estonia, Latvia and

Lithuania were eligible for Know How Funding. By November fourteen projects with

19

a total estimated cost of £393,200 had been approved for the Baltic states. These, in

many respects, bore more resemblance to those underway in east-central Europe to

those recently envisaged for the Soviet Union. They ranged from an energy audit

mission to Lithuania, casted at £3,500, to short-term scholarships, totalling £120,000,

and aimed at enabling postgraduates and young professionals from all three republics

to study economics, finance and management

Two of the more expensive projects approved for the Baltic states provided for

the short-term attachment of retired senior British diplomats to their foreign ministries

to advise on 'restructuring in a democratic society' (£15,000), and the sending to

Baltic capitals of serving British police officers to advise on police training and

restructuring (£20,000). The former involved visit by John Rich, a former British

ambassador, and Sir Patrick (now Lord) Wright, the recently-retir d PUS, to Tallinn

and Vilnius respectively. The latter was implemented by a Strathclyd police team

which included, during its visit to Riga, a woman police sergeant from Dun table, a

lady who enjoyed the distinction, rare presumably within the Bedfordshire

Constabulary, of being a Latvian-speaker. Both projects were videnc of the

diversity of Know How work and the extent to which it drew upon the talents and

services of a variety of individuals and institutions. It was therefore all the more

appropriate that in his report on the Estonian foreign ministry Rich str ed that no

foreign ministry could in modern times handl all aspects of a country's external

affairs and that there was an international aspect to work of many government

departments. Know How diplomacy, which focused upon encouraging not only

economic and political, but also social, change abroad, was a good an example as

any of the intemationalisation of the domestic.

Elsewhere in the FSU th re was a gradual change in the profile of funding as

support shifted from a large number of relatively small projects towards a more

systematic approach to larger schemes. The JAU (E) was particularly concerned with

developing a project pipeline which would absorb as much as possible of the funding

available during the following framework years, while still leaving the Fund with

20

scope to respond flexibly to fresh contingencies and altered perspectives. It also

remained committed to sponsoring a broad range of politically-oriented work,

including legal, journalistic, civil service and diplomatic training, and wider opinion­

changing projects. The British Council-administered Training and Academic Links

(T ACLS) scheme was, for instance, to become busily engaged in promoting co­

operation and dialogue between British and FSU higher education and training

institutions. And by 1993 the KHF was providing 50~ of the funding for a BBC

World Service project, aptly named the 'Marshall Plan of the Mind' . A project team,

which included writing consultants, producers and studio manag rs, was set up to

work with staff in Russia in order to broadcast a suite of four programmes for

different audiences, ranging from a hightly innovative soap opera with business

content for all the family to print-supported courses for practitioners and students of

business. The BBC trained local producers and writers, established an office, agreed

air time, and negotiated print links. It was in these respects fulfilling ju t the kind of

attitude-changing and educational roles that early protagonists of Know How Funding

had been hoping to promote.

A Flexible Fund

Audience assessment was regarded as fundamental to this project, as also was the

development of local competences in market research. But it would be difficult to

measure the int1uence of the broadcasts on business activity and practices in Russia. It

would be even more difficult to attempt any broader evaluation of the impact of

Know How Funding in general on former communist societies. At the time of its

establishment in 1989 the KHF had an underlying political and strategic objective: it

was intended to help ensure the stability and viability of lands in transition and

thereby assist in promoting security in Europe. Yet, only seven years on since the

bringing down of the Berlin Wall, it is far too early to assess the Fund's contribution

to the achievement or non-achievement of such ends. Evidence so far available

permits only a superficial assessment of the extent to which the deployment of the

KHF may have served Britain's more narrowly-defined national interests. This does

21

not, however, exclude the possibility of looking at some of strengths and weaknesses

of KHF. Its administration and conduct have, after all, been internally reviewed on

several occasions, and individual projects have been subjected to rigorous evaluation.

The Fund has been praised for its t1exibility and for the way they have responded

speedily to changing situations. The JAUs have been imaginative in their approach

and have taken ri ks in funding projects which might have found no place in a

conventional aid programme. They have stimulated, adopted and adapted private

sector initiativ , and have been pluralistic in their approach to recipients, preferring

to work with non-governmental organisations and agencies and thereby escaping

some of the limitation a ociated with inter-governmental arrangements. And there is

a case for arguing that the Fund ha h en a good deal more efficient in delivering their

servic than s m multilat ral technical a sistance programmes.

Th KHF ha , how v r, rar ly b en without its critics. In some respects a

diplomatic initiative d ign d to demon trate Britain' commitment to supporting

reform in ast rn Europe, it ha ften app ared underfinanced and understaffed. In its

early day KHF wa innovativ , but, in their eagern s to dishurs funds, officials

were perhap hort-t rmi t in th ir approach and, it has been suggested, more

concern d with n ouraging in titutional, a oppo ed to broader structural, reforms.

There wa , n DA official lat r complain d, a tendency to support ideas that

ound d go d and to put a 1 t f tru tin the analy i of those who proposed projects.

S me f th KH ' hortcoming may al o in part be attribut d to budgetary

limitati n . ompati n b tw n bilat ral aid programme can be problematic. Their

ize v ry often ret1 cts the particular int re t of donor tates: Germany's aid to Russia

ha for in tanc included financial upport for the withdrawal of Soviet forces from

the former GDR. But in the financial year 1991-92 the United Kingdom allocated £10

million to KHF work in th f rmer Soviet Union. In that same year the German

federal gov rnm nt committed $12 billion to as istance to the same region, and

individual German government departments allocated a total of about $180 billion.

The KHF h frequ ntly been about trying to make a very little go a very long way,

22

about maximum glitz and minimum bucks. Even the glitz has sometimes been

missing, as for example when in 1992 the JAUs mved into new accommodation in 24

Whitehall, a rabbit warren of what were then poorly lit and not very well ventilated

rooms of a uniformly depressing character. In the words of one official, its 'dingy

decoration and blotched mirrors gave the entrance the air of a low class brothel' .

The apparent lowliness of the establishment seems not to have deterred the

JAUs' clientele. Indeed, the Fund has maintained a high profile and is now probably

the best known of the Western bilateral aid programmes in central and eastern

Europe. By the autumn of 1995 the two JAUs had a staff of sixty-nine and British

missions aero the region, including central Asia, had home based and local staff

assigned to supporting the development and implementation of KHF programmes.

Over 350 proj cts had been completed or were under way in Russia alone. Health

reform had b en added to the five key sectors upon which the KHF had originally

focused in the former Soviet Union , and recent projects included management

training for nior ho pital doctor in the Sverdlov k obla t and the improvement of

reproductive h alth care for w men in Samara. Since 1991 the KHF-sponsored

Technical Links Scheme has been engaged in supporting technical projects carried out

by individual 1 cal authorities, and by profes ional bodies in local government, with

their oppo it number inc ntral and east rn Europ ; and since 1992 the Department

of the Environment has been funding the Environmental KHF with a view to tackling

the region' nvironmental problem . An emerging voluntary sector was meanwhile

assist d by Charity Know How, a chem initiated in concert with various charitable

tru ts and foundations. There ar , in hort, few areas of civil life uncovered by the

Know How Fund.

'Th Briti h', Profe sor Norman Stone once remarked, 'are very good at

disaster-management- none better'. Communi m ' collapse could hardly be

designated a di ast r. Confusion, cri i and conflict have, however, accompanied the

crumbling of the old order, and the KHF has b en about supporting reform whilst

attempting to att nuate the potentially de tabilising effects of radical change. The

23

process has not truly added to the diplomatic agenda: aid policies have always had

regenerative as well as developmental functions, and the transfer of knowledge and

skills has long figured large in relations between richer and poorer nations. But the

Know How Fund has extended the FCO' s constituency and that of a number of other

government Departments. It has created contacts with a whole range of activities,

bodies and institutions which might once have been judged peripheral to the main

concerns of government. Courses in signalling and telecommunication have been put

on for Polish railway engineers, equipment has been supplied to the Foundation for

Local Democracy at Lodz, and pioneering work has been done on share issues for the

Red October chocolate factory at St Petersburg. In a revolutionary age, diplomats, a

breed frequently criticised for paying too much attention to wining and dining, have

been quick to recognise the importance of improving bread supplie to Moscow and

Kiev. Indeed, while the birth of totalitarian states in the twentieth century did much to

encourage the growth of total diplomacy, their demi e ha m d only to r inforce

the tendency. The Know How Fund has had to addres problem to which there have

been no easy answers, and through the mobili ation of Britain' d m tic r source , it

has contributed to the We t' effort to as i t the tran formati n f a nee

ideologically separate East.

24